The Financial Accounting Standards Board (FASB) is poised to consider tweaking its lease accounting standards.
Under the current accounting rules that some companies are still adjusting to, operational leases are disclosed on the balance sheet, both as an asset and a liability, in the same way as capital leases. Previously, operating leases were disclosed as expenses on the income statement and in the footnotes to the financials.
The current lease standards, effective for public companies for fiscal years beginning after Dec. 15 of 2018, were aimed at shining a spotlight on the risk leases can pose. Some organizations have thousands of them, which can expose them to liability.
Guidance on the treatment of leases, updated in 2016 under section 842, is one of three major standards currently undergoing post-implementation reviews, FASB spokesperson Christine Klimek wrote in an emailed response to questions.
“It is typical for a large significant standard to require some fine tuning after it’s been issued,” Klimek wrote. The potential improvements to the accounting will focus on issues around leases between entities under common control, according to the agenda. Klimek said it is a narrow area of the leases guidance that was raised as part of the board’s ongoing post-implementation review of the leases standard.
Separately, next week FASB will also consider whether to move forward with a project to set fresh accounting standards for joint ventures.
Joint venture accounting guidance would fill a void in Generally Accepted Accounting Principles (GAAP) which do not currently address joint ventures. “That lack of authoritative guidance has been brought to the board’s attention through several avenues over the last several years, both by [Securities and Exchange Commission] SEC staff and several practitioners that have requested that the board clarify this issue through standard setting to improve practice and eliminate diversity,” according to FASB materials for the Sept. 14 meeting.
Last fall the board tentatively decided to require joint ventures to disclose information to increase transparency including the formation date and the entity’s fair value on that date, the new entity’s assets and liabilities, and a “qualitative description” of the goodwill recognized by the business.
A joint venture is defined as a business arrangement in which two or more parties agree to pool their resources, according to Investopedia. Goodwill is as an intangible asset such as a company’s brand name or customer base. It arises when a company acquires another business for more than its book value but can also come into play in a joint venture.